Academic Year:
Summer 2010
Examination Paper Number:
705 – Exam 2 (Final)
Examination Paper Title:
Corporate Finance (Dr. P. McKnight)
Duration:
2.50 HOURS
Structure of Examination Paper:
There are 8 questions in total.
Total number of points possible for this examination paper is 150. Total number
of points possible for each question is shown in brackets alongside the question.
Instructions to Students:
Answer ALL questions.
You must show all work or no credit will be given.
This is a 100% individual effort. Do not discuss the exam or its components
with your colleagues.
Name: ___________________________
Signature: ______________________________
1. SBC plans to acquire Charter Inc. in a stock-for-stock deal with Charter
receiving $91.25 for each share of its common stock. SBC expects no change
to its P/E multiple post-closing.
Pre-Deal Facts
Charter Inc.
SBC
Earnings Available for
Common Shareholders
$181,500
$62,500
Share Outstanding
135,500
90,750
Market Price per Share
46.25
$72.50
Required:
i.
ii.
iii.
iv.
v.
Compute the exchange ratio.
Compute the share premium.
Compute the new EPS of the combined company.
Compute the new Share Price of the combined company (assume
existing P/E ratio).
Briefly advise (discuss) on the M&A deal.
(20 points)
2. Discuss this chart.
(15 points)
3. VISA Inc. has decided to go public with a $5,000,000 new equity issue. Its
investment bankers agreed to take a smaller fee now of 6 percent in exchange
for a 2-year option to purchase an additional 200,000 shares of the company
at $5.00 per share. The investment banking firm expects to exercise its option
and purchase the 200,000 shares in exactly two year's time when the stock
price is expected to be $12.00 per share.
Required:
Calculate the value of the entire underwriting agreement to the investment
banker. Assume that the investment banker's required return on such
arrangements is 15 percent (ignore any tax considerations).
(20 points)
4. The price of McDonald's Corp. stock (ticker: MCD) is currently $71.89.
a) The options on MCD’s stock have an expiration date of 3 months with
a strike price of $85.
b) The variance on MCD stock is 50%.
c) The risk-free rate is 3%.
d) The dividend yield is 2%
Required:
Compute the value of the call and put based on the above assumptions.
(20 points)
5. Motorola Inc. wants to maintain its capital structure that consists of 30
percent debt and 70 percent equity. The company forecasts that its net
income this year will be $1,000,000. The company follows a residual dividend
policy and anticipates a dividend payout ratio of 40 percent.
Required:
Compute the size of the company’s capital budget?
(20 points)
6. Consider the following financial information for both Ford Motor and
Caterpillar.
Ford Motor – Financial Data (2008)
Current assets
Current liabilities
Retained earnings
Total assets
Long -term debt
Shares outstanding
Share price
Sales
EBIT
Interest expense
Earnings before tax
Tax rate
$34,124,000
49,178,000
-62,145,000
218,328,000
235,636,000
2,412,000,000
0.29
146,277,000
-23,812,000
20,000,000
-43,812,000
40%
Caterpillar – Financial Data 2008
Current assets
Current liabilities
Retained earnings
Total assets
Long-term - debt
Shares outstanding
Share price
Sales
EBIT
Interest expense
Earnings before tax
Tax rate
$48,949,000
55,390,000
6,360,000
163,429,000
98,144,000
3,925,000,000
47.12
405,607,000
22,798,000
10,000,000
12,798,000
40%
Required:
a. Compute the Z-score for both Ford and Caterpillar.
b. Discuss the results and the likelihood of failure for both firms.
(20 points)
7. Apple, Inc. is expected to have cash flows grow at a rate of 8% a year for the
next two years, followed by a growth rate of 4% a year for the next three
years, then followed by an expected growth in cash flows of 3% a year,
indefinitely. The required rate of return on Apple, Inc. is 11%. As of the
year end, Apple Inc. had $2.75 per share in cash flows.
Required:
Calculate the stock price.
(20 points)
8. This question has three parts.
a) According to the literature, ‘value’ investment styles have consistently
outperformed ‘growth’ styles. Discuss?
b) Suppose Target announced this morning that its profit from last
quarter dropped eight percent compared to the previous quarter.
However, Target’s closing price today was up two percent from
yesterday. Discuss?
c) Discuss the extent to which you believe markets are efficient?
(15 points)